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41 in the next three years. The current price for Wal-Mart implies strong growth prospects. The company does have a sound strategy to retain its new customers and refocus growth efforts on less-saturated markets overseas.
In short, while there can be little doubt as to Wal-Mart's operational excellence, it is not necessarily a great investment. Growth has in recent years been of the slow and steady variety. The company's present valuation may be symptomatic of its status as a safe haven for investors during tough economic times. This means that the growth implied by its current share price may not be justified. Therefore, while Wal-Mart is a great company to own, it may not be the best investment at its current price and with the market beginning to show signs of recovery. The 0.20 beta and historic low volatility mean that Wal-Mart shareholders will not reap the benefits of market increases. The best use of Wal-Mart in a portfolio would have been as protection last fall from the market declines. Thus, I do not recommend purchasing Wal-Mart now, unless taking a strong bearish view of the recovery from the economic downturn.
While three-quarters of Wal-Mart revenues comes from the U.S. market, concerns about cannibalization have convinced the company to shift strategy away from new domestic growth. Wal-Mart is now placing increased emphasis on international markets as a source of new growth. By store numbers, the largest international markets are Mexico (1197 units), Japan (371 units), United Kingdom (358 units), Brazil (345 units), Canada (318 units) and China (243 units). Much of the remaining international operations are in Central and South America (2009 Annual Report).
These figures highlight two key aspects of Wal-Mart's international expansion strategy. One is that the company is expanding into a variety of international regions. This gives Wal-Mart a hedge against regional economic downturn in any one particular region. However, they also cluster their growth. They have parlayed the success of their Wal-Mex subsidiary into a strong presence in other Latin American markets, for example.
The other key aspect of Wal-Mart's international expansion strategy is that they are expanding carefully. They have only entered one European market for example. They have stores in China and Japan, but not in other Asian growth markets. This steady strategy of not moving into too many different markets until they have built up share in existing markets has a corollary in their delayed entry into Canada and Mexico, which did not occur until they had attained substantial U.S. presence.
When Wal-Mart reports international operations, they do so on an aggregated basis. They do not provide in their 2009 Annual Report information about one specific international subsidiary. "International" is its own operating division for reporting purposes.
At present, the foreign operations are worth just under 25% of company revenues. Foreign stores are up 32.2% in the past three years. In the U.S., new store growth over the past three years was 6.1% for Wal-Mart stores and just 3.9% for Sam's Club (2009 Annual Report). Correspondingly, international sales have been increasing in importance. In 2007, international sales accounted for 22.3% of the companies revenues. This increased to 24.1% in 2008, then again to 24.6% in 2009. In both 2008 and 2009, international sales growth was stronger than either domestic Wal-Mart or Sam's Club sales growth. In 2009, international sales growth was 9.1% and in 2008 it was 17.6%. Domestic growth for those two years was 6.8% and 5.8% respectively. It should be noted that the improvement in the importance of international sales in 2009 was attributable in part to favorable currency exchange rates, which imparted a $4.5 billion gain (Ibid). Nonetheless, Wal-Mart sees its foreign operations as a major source of future income, particularly as the domestic market becomes increasingly saturated.
The favorable exchange rate helped to mask what was otherwise a slow year for overseas growth in terms of contribution to revenue. However, international growth is still going to be the engine for Wal-Mart going forward. The company has set up an office in Hong Kong with an eye towards managing its Asian expansion, including operations in India, where the company has yet to set up a store.
Clearly, Wal-Mart views global operations as the key to growth in the future. They do not, however, see these operations as a means by which they can hedge against domestic downturn. This is because domestic operations have not experienced a downturn, even in the current economic crisis. Wal-Mart's position as a discounter helped them to grow in the past year despite the adversity that hurt earnings at many other American companies. If anything, the economic crisis hurt international sales growth as opposed to domestic.
However, given the relative saturation of the U.S. market, there is little doubt that continued growth into China, India and Latin America in particular will drive Wal-Mart's strategy for years to come. If revenue ever dips in the U.S. Or growth begins to slow significantly, the company is well-positioned to build out international operations to make up the difference. They are continuing to add stores in most of their overseas markets, and have developed models of operating in those markets that leverage Wal-Mart's competitive advantages in back-end operations to achieve success with different retailing formats. The company's entry into India, for example, has been as a back-end partner to an Indian retailer. Wal-Mart has opened restaurants in Mexico has part of its expansion strategy. They are finding new ways to leverage international expansion for the long-term well-being of the corporation as a whole.
Wal-Mart 2009 Annual Report. Retrieved June 7, 2009 from http://walmartstores.com/sites/AnnualReport/2009/
Some financial data and ratios from MSN Moneycentral. Retrieved June 7, 2009 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=WMT
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